Shares of mobile app company Snap (SNAP) fell just below its initial public offering (IPO) price of $17 on July 10, closing at $16.99.
This is the first time the Los Angeles-based company suffered this kind of blow.
Snap, which is behind the popular app Snapchat, was first listed on the New York Stock Exchange in March, and already stocks jumped 44 percent above its IPO price of $17, closing the day with at $24.48. Not even its strongest competition was able to match this: On its first day of public trading, Facebook (FB) only gained very little on its IPO price.
Snap’s stock was able to hit a record intraday high the next day, closing at $29.44.
But on the days preceding, it had otherwise been a bumpy ride for Snap. It was faced with increasing competition and reported first quarter earnings that were below the expectations of analysts. Over the past three months, shares have dropped 19 percent, while the S&P 500 gained 3 percent. Analysts also suggest that the company may find it challenging to survive in a Google- and Facebook-dominated advertising space.
After Snap’s stock plummeted on July 10, Morgan Stanley, one of the underwriters on the company’s IPO, downgraded the stock and slashed the price target to $16 – $1 below the company’s March IPO price. According to analyst Brian Nowak, they had been “wrong about the company’s ability to innovate and improve its ad product” for the year.
“Snap’s ad product is not evolving/improving as quickly as we expected and Instagram competition is increasing,” noted Nowak.
The move from Morgan Stanley is considered uncommon for a lead underwriter to do very early after a listing.
The growth of Facebook-owned Instagram is a huge factor in the downgrade. The analyst believes the popular photo-sharing app will continue to be more disruptive, given that Instagram is now giving out free sponsored lenses to advertisers. Moreover, despite the decline in Facebook app downloads, Instagram app downloads are growing.
Nowak also gave modest revenue forecasts for Snap and is not expecting the company to turn a profit until 2020. He also expected Snap to report promising earnings by 2020.
Other analysts slammed the company’s declining shares. Scott Galloway, NYU Stern professor, commented that Snap is the most overvalued company in the world, adding that investing in the company is like “driving drunk”. “I think [investing in the company] is something no responsible person should do,” he told CNBC.
Galloway also went on to say that companies like Facebook could easily get Snap out of the picture. In a report published by TheStreet, Jim Cramer commented that tech giants Facebook and Amazon (AMZN) are so powerful that they can crush any competition. “I feel bad for Snap,” he added.
Meanwhile, stock of the much-hyped Blue Apron also sank below its IPO price after two days of trading publicly. It closed at $7.14, dropping 12 percent from its IPO of $10. The lackluster performances of recent IPOs like Snap and Blue Apron have analysts questioning the companies’ ability to compete. According to Galloway, this is the best time to be private.
In the face of the stiff competition, Snap continues to introduce new products. There’s Snap Map—a feature that allows users to see their what their friends and other users are snapping all over the world. The company is still growing, albeit gradually, and has yet to tap a growing user-base outside North America, Quartz reports.
Despite ratings, Nowak still doesn’t undermine the young company’s potential. He stressed the fact that Snapchat still has strong user activity, with users spending an average of 30 minutes a day on the app. The company is also bolstering key areas in its business, including user engagement, buying, measurement and creative ads.